An empirical investigation of corporate asset downsizing

We study 130 large asset downsizings in 1985-1994. We find that downsizings are most often accomplished by selling assets. The decision to downsize is negatively related to operating performance at both the firm and industry levels and is positively related to firm debt ratio and level of diversification. Following their downsizings, the sample firms are more focused, have lower debt ratios, and experience statistically significant increases in operating performance. These results suggest that large downsizings are efficient responses to declining circumstances. However, we also find that their occurrence is strongly dependent upon an active market for corporate control.